A Russian gas embargo would lead to severe recessions in eastern Europe and Italy if countries around the world hoarded their own scarce supplies, the IMF warned on Tuesday in a bid to encourage solidarity between nations.
The fund predicted that unless liquid natural gas was shared and prices were artificially held down, any Russian action to stop supplying Europe would trigger economic contractions of more than 5 per cent over the next year in the Czech Republic, Hungary, Slovakia and Italy.
Forty-two per cent of the EU’s gas imports come from Russia, according to the IMF. Russian flows provide more than 50 per cent of gas imports for eight EU countries.
A Russian gas embargo has become increasingly more likely following its invasion of Ukraine. Moscow has restricted deliveries through its Nord Stream 1 pipeline, which runs from Russia under the Baltic Sea to Germany, by 60 per cent in June. Fears are mounting that it will not turn supplies on again this Thursday after planned maintenance.
European gas consumption has already fallen 9 per cent this year, knocking 0.2 percentage points off EU GDP, according to the IMF, but its simulations warned that without mitigations, the pain could become much worse in the winter. Brussels is next week set to tell member states to cut consumption “immediately”.
The IMF modelling suggested that the European economy could manage with Russia curtailing supplies by 70 per cent, but there would be shortages if there was a full embargo on exports. The worst affected European countries would only be able to access supplies between 15 and 40 per cent below their needs.
Hungary, Slovakia and the Czech Republic had very high use of Russian gas, while Italy is vulnerable due to its high use of gas in electricity production, the fund said.
The worst impacts would arise if gas was not shared between European countries, both because of physical bottlenecks in supply and hoarding by individual nations and if households were protected from price rises by governments and so did not limit their use over the winter for heating.
The fund recommended that if governments wanted to protect vulnerable households from soaring costs, they should offer them flat rate subsidies or increases in income. This would maintain incentives for people to limit gas usage.
If Europe showed solidarity between nations and integrated its market into global liquid natural gas, or LNG, supplies, Russia would not be able to push the EU into a serious recession this winter.
In its most optimistic scenario, a Russian gas embargo would reduce EU GDP by just 0.4 per cent with only Hungary suffering a contraction over 1 per cent.
“If EU markets remain integrated both internally and with the rest of the world, our [modelling] suggests that the global LNG market would help buffer economic impacts,” according to IMF economists from its European and commodities directorates.
“This is a moment for Europe to build upon the decisive action and solidarity displayed during the pandemic to address the challenging moment it faces today.”
The European Commission will next week provide countries with voluntary gas reduction targets amid fears that the requisite solidarity does not exist between member states.
The concern is that countries such as Germany will be faced with the choice of shutting much of its industry or allowing households in neighbouring countries to freeze this winter. The IMF’s modelling is designed to highlight the benefits of taking steps now to share supplies.
Source: Economy - ft.com
